Do I have to report capital gains on the sale of a second home now or do I have 2 years to re-invest?

Q: I sold a second home which I rented last year. Do I have to report the capital gains in my 2003 tax return or do I have 2 years to re-invest? —Lorna, Jamaica Plain

The following answer was provided by Mark Misselbeck, CPA, Levine Katz Nannis & Solomon PC, Needham.

A: You are confusing several current or expired tax provisions. Prior to May of 1997, the tax rule was that if you sold your PRINCIPAL RESIDENCE, you had two years within which to replace it with a PRINCIPAL RESIDENCE that was at least as expensive as the one that you sold and not pay tax on the gain. This would not have applied to a second residence.

If you have a property that is purely rented out for the income, you could "swap" it for other real property, but would be taxed on any cash, non-real estate property or debt reduction involved in the transaction - receipt of cash would result in taxation under this provision, without the ability to defer tax through purchase of a replacement property (called a like-kind exchange).

If your property - residence (primary or second home) is destroyed by casualty (fire, hurricane or flood) or taken by eminent domain, you have three years to replace or rebuild the property with any insurance proceeds received for the damage.

If you sell your PRINCIPAL residence, current law will permit exclusion of $ 250,000 ($ 500,000) of the gain on the sale if you have owned and used the property some 2 years out of the last 5 (not necessarily the same 2 years).

The property you describe involved in the transaction you describe meets none of these circumstances (or the tax provision is not even available any longer). Sorry.